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The Loonie’s Flirtation with Parity: Prospects and Policy Implications

Author

Listed:
  • Philippe Bergevin

    (C.D. Howe Institute)

  • Colin Busby

    (C.D. Howe Institute)

Abstract

With the Canadian dollar near parity with its US counterpart, monetary policymakers may come under pressure to curb future interest rate increases to limit the loonie’s appreciation. When the value of the loonie is in line with economic fundamentals, such actions would necessarily compromise the domestic inflation target. By examining the factors underpinning the Canada/US exchange rate, we conclude that the present trading range for the loonie is supported by fundamentals. The Bank of Canada should therefore continue its policy of benign neglect with regard to the exchange rate.

Suggested Citation

  • Philippe Bergevin & Colin Busby, 2010. "The Loonie’s Flirtation with Parity: Prospects and Policy Implications," e-briefs 101, C.D. Howe Institute.
    • Handle: RePEc:cdh:ebrief:101
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    References listed on IDEAS

    as
    1. Philipp Maier & Brian DePratto, 2008. "The Canadian Dollar and Commodity Prices: Has the Relationship Changed over Time?," Discussion Papers 08-15, Bank of Canada.
    2. Ramzi Issa & Robert Lafrance & John Murray, 2006. "The Turning Black Tide: Energy Prices and the Canadian Dollar," Staff Working Papers 06-29, Bank of Canada.
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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